Monopolistic competition, rising markups, and optimal taxation of participation

Eren Gürer

Journal of Public Economic Theory, 2024, vol. 26, issue 1

Abstract: This study explores the optimal taxation of participation within a monopolistically competitive product market that exhibits increasing markups. Individual labor supply responds along both intensive and extensive margins. The government simultaneously optimizes a nonlinear Mirrleesian income tax scheme, a flat profit tax rate, and a flat unemployment benefit. It is shown analytically that the monetized welfare cost of an increase in unemployment benefit is higher under monopolistic competition compared to under perfect competition. Nevertheless, numerical simulations suggest that the optimal unemployment benefit increases in response to greater markups when the government simultaneously optimizes all of its tools. The reason is that, along with a higher profit tax, rising markups require a decline in marginal income taxes. Lower marginal income taxes relieve the extensive margin distortions and accommodate an increase in the unemployment benefit. Accordingly, optimal nominal participation taxes remain approximately unchanged for the lower half of the ability distribution. For the upper half, the decline in income taxes outweighs the increase in the unemployment benefit, leading to lower optimal nominal participation taxes.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/jpet.12661

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jpbect:v:26:y:2024:i:1:n:e12661

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1097-3923

Access Statistics for this article

Journal of Public Economic Theory is currently edited by Rabah Amir, Gareth Myles and Myrna Wooders

More articles in Journal of Public Economic Theory from Association for Public Economic Theory Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().